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10 POLICY • Vol. 30 No. 3 • Spring 2014
CoaSe LookS at ChiNa
‘Bargaining games have non-cooperative outcomes
even when the bargaining process is costless’.
He adds that ‘it is cheaper to engage in strategic
behavior when communication is inexpensive’.
Buchanan goes as far as to speak of ‘Te irrelevance
of transaction costs’ (the title of a paper of 1984).
He even takes up some of Cooter’s objections
to the porte-manteau character of transaction
costs. ey not only are made to include the
prohibitions, such as that of side-payments, often
imposed by authorities; they also are presented
as including information and communication
constraints; and, least acceptable, also free-riding
and strategic behavior.
e conclusion of Cooter's critique is that the
Coase Teorem has limited applicability, and is
valid only for competitive markets. Should we rest
content with this negative conclusion?
Buchanan's Institutional Point of View
Te starting point of Buchanan’s critique (1984)
is that Coase and many Coasians seem to think
that there exists a unique efcient allocation of
resources in any situation that can be seen as
determinate by any external observer. He proposes
that the analysis of Ronald Coase be re-interpreted
from what he calls a ‘subjectivist-contractarian’
point of view. He also terms this viewpoint as
‘Austrian-Wicksellian’.
He started, as was his wont, by denying that
optima were observable. Te fallacy in ordinary
formulations of the Coase eorem was that
the optimum can be objectively defned. It was
wrong to defne a situation as beset by externalities
because an objective optimum had not been
reached. ‘It is unfortunate’, he said, ‘that Coase
presented his argument … largely in terms
of presumably-objectively measurable and
independently-determined harm and bene t
relationships’. It was a mistake to think ‘that
an ‘efcient’ … allocation exists and becomes
determinate conceptually to any external observer’.
An external observer could not determine whether
a trade fell short of an optimum. Each transactor
discovered what was optimal for him or her and
accordingly when he came or failed to come to
an exchange. Realised trades, whether under
conditions of perfect competition or not, must
be optimal, though the institutional framework
may not be. Whether transaction costs are high
or low is irrelevant for the decision to execute or
not the trade in question: it will be optimal ‘given
the institutional setting'.
Now, this seems to be fction out of Voltaire’s
Candide, where everything is for the best in the
best of possible worlds, be it the rape of
Cunegonde or the destructive Lisbon earthquake
of 1755. Not so, says Buchanan. When the parties
to a transaction discover they are not satisfed
with the agreement reached, they will try to
change the institutional framework in which they
operate, as long as they can negotiate without
political interference. 'If the initial [institutional]
constraints are deemed to be ‘inefcient’ potential
traders will, themselves, fnd it advantageous to
invest resources in eforts to shift them’.
Agreement on a change in the rules within
which the exchanges are allowed to take
place would be a signal that patterns of
outcome reached … under the previously-
existing set of rules are less preferred or
valued than the patterns expected to be
generated under the rule-as-changed.
Two unexpected and illuminating consequences
can be drawn from this analysis. e rst one
is that the notion of transaction costs is not very
useful, as Cooter had foreseen. Tese ‘objectively
observed transaction costs’ are a rag-bag of
information defciencies, prohibitions by
authorities, voluntary hiding of intentions, strategic
behavior, anti-social free-riding—not helpful
analytical tools. e second one that these
so-called 'transaction costs' barriers to
‘efciency’ in resource allocation can be
more appropriately analysed in the context
of hypotheses about institutional reform.
The notion of transaction costs is
not very useful.